CHAPTER ONE
1.1 BACKGROUND TO THE STUDY
Non- interest banking otherwise or also known as Islamic banking is one which raised a lot of fumes in Nigeria and the world over. It usefulness as well as its religiosity raised a lot of controversy. Some have seen it as a good way of banking while others have given it a dismissal attitude. If this is so, we would like to know what this system of banking entails and weather it is useful to the society and the world at large. In doing so, it raises a question in our mind. That is, ‘what is non- interest banking?’
Non-interest banking or Islamic banking is a banking activity that is consistent with principles of sharia and its practical application through the development of Islamic economics. Also according to Charles M. Hudwick, in his book Banking evolution, 2008, pg.205, Islamic banking refers to a banking activity or a system of banking that is in consonance with basic principles of Islamic sharia (rules and values set by Islam).
Furthermore, as defined by Abdul Gafoor in his book titled ‘interest-free commercial banking’, 1995, Islamic banking is a banking system which is based and propelled by the sharia. Nothing is done by a non-interest bank without reference to the sharia and the Quran.
Banks play a crucial role in the modern economy essentially. They perform some important functions in society and significantly influence the distribution of income, the level of economic activity and even the level of cost in a country positively. The function of financial institutions in economic development cannot be overemphasized considering the evidence from the current empirical studies, which suggest that broader, deeper, and better-functioning financial system can enhance higher economic development which is highly necessary and desirable for Muslim country’ economics (International Center for Education in Islamic Finance, INCEIF, 2006).
In 2008, the central bank of Nigeria (CBN) asserted that the poverty has been a recurring problem in Nigeria since the 1980s.it declared that 70% of Nigeria’s population of well over 150million is not only unbanked, but also lives below the poverty line. In view of this, successive Nigerian governments over the years have introduced different policies that will facilitate access to finance for all in order to reduce between the have and have not.
Unfortunately, the government’s efforts in that respect have failed due mainly to low income level or lack of awareness about/ or distance from where the services are available. For instance, the CBN long ago have presented micro finance banking in rural and urban settings to cater the needs of non-bankable Nigerians and promote financial inclusion, but still the system ended up being relentless with the problem of low patronage or participation particularly in the northern part of the country. The rejection may be owing to conventional interest based microfinance; its non-compliance with Islamic principles, especially the paying and receipt of interest(riba), which is strongly prohibited under Islamic sharia law (Aliyu,2013). The rise of Islamic banking in Nigeria rooted in 1991 with the promulgation of banks and other financial institutions Acts (BOFIA), which replaced banking Acts of 1969. In 1992, the central bank granted license for Habib Nigeria Bank limited (former bank phb and now keystone bank plc), to offer non-interest banking services on a’ window basis’. In addition, under the governorship of Charles Chukuwuma Soludo, the CBN joined the Islamic development bank (IDB) as a full member and the basic business model of this bank was to provide financial assistance and support on profit sharing, and also the international financial services board (IFSB) as full member.
The origin of Islamic banking system can be traced back to the advent of Islam when prophet himself carried out trading operations for his wife. The ‘mudarabah’ or Islamic partnerships has been widely appreciated by the Muslim business community for centuries but the concept ‘riba’ or interest has gained very little diligence in regular or day-to-day transactions.
The first model of Islamic banking system came into picture in 1963 in Egypt. Ahmad Al Najjar was the chief founder of this bank and the key features are profit sharing on the non interest based philosophy of the Islamic sharia. These banks were actually more than financial institutions rather than commercial banks as they pay or charge interest on transactions. By the end of 1970, several Islamic banking systems have been established throughout the Muslim world, including the first private commercial bank in Dubai (1975), the Bahrain Islamic bank (1979) and the faisal Islamic bank of Sudan (1977).
The history of Islamic banking in Nigeria is very short and not most individuals regard Islamic banking in Nigeria as having a history due to its young age. However, for the purpose understanding this research, we would give a brief history on Islamic banking in Nigeria. Islamic banking was first introduced in Nigeria by the CBN governor, Sanusi Lamido Sanusi as an alternative to the other forms of banking in Nigeria in the year 2010. He introduced this banking system so as to ensure that the excesses of the commercial banks where checkmated. In 2005, the Nigeria’s central Bank (CBN) approved jaiz Bank’s request to establish non-interest banking.
Also in 2008, some conventional banks sought CBN license to run non-interest banking window. It is significant to note that by the time of this research the only full-fledged non-interest bank in Nigeria is jaiz bank plc., which on 11th November, 2011, was granted a license from the Nigeria’s central bank, the national banking regulator, to operate as a regional bank. On 6th January, 2012, the institution commences business with offices and branches in Kano, Kaduna, Kwara and Abuja (Jaizbank.com) The banks ultimate objective is to expand beyond the shore of Nigeria in line with its vision. The bank intends to increase its current share capital base from ₦15 billion (USD $75 million) to ₦25 billion (USD $125 million). This upgrade will enable the bank position itself towards the actualization of its vision of serving the sub Saharan African markets effectively in one of the most thriving sectors of African economy.
The bank sees absence of sharia compliant liquidity management instruments in the Nigerian money market as a major hurdle to growing earning assets, as only Osun state has been able to issue sharia compliant sukuk bonds as of today.
In the last two decades, the banking sector witnessed the emergence and the development of a new financial industry: The Islamic banking (Goaied, 2015). The Islamic banking system emerged as a competitive and a viable substitute for the conventional banking system. Islamic banking has grown substantially and has become one of the well truly established world’s fastest-growing economic sectors. This industry is characterized by banking operations excluding the use of the interest rate and it is based on underlying fundamental concept of justice as well as sharing risk.
Economic prosperity means having the money necessary to fill your needs and many of your desires (Taylor hall, 2015). Let’s note that a nation can be economically prosperous as economic prosperity comes from earning sizable amounts of money. For example, a young broke person is not economically prosperous. After several years at a good job, this young person begins upgrading to a functional car, a nicer apartment or home, a washing machine and dryer, the ability to buy what they want from grocery store, trips to restaurants if they would like, money in savings and investment accounts. They can afford a vacation annually. This person is now economically prosperous. It can have different levels of status (living a middle class life is prosperous, but a yacht and private plane is more prosperous), but overall economic prosperity is having the level of money you need to take care of yourself and family, without the stress of surviving from paycheck to paycheck.
Islamic banking can ensure economic prosperity because of its non-interest nature, this will help in increasing the level of savings and investment as no interest rate is charged thus giving an individual the opportunity to save without the fear interest rate, with the profit and loss sharing ratio the financial status of an individual will increase, this will further lead to economic prosperity. Islamic banking emanated from Islam which discourages concentration of wealth in a few hands thus the Importance of Islamic banking system is to bridge the gap between the rich and the poor by modifying the distribution of wealth and economic resources in favor of less fortunate (Ismail 2010).
1.2 Statement of the Problem
There has been much debate over whether the growth of financial intermediation facilitates economic development or if banks expand because of economic development (African development Bank, 2011). Islamic Banking has become ever popular in the last three decades, not only in Arab and Islamic world but also in other parts of the World (Fatai, 2012).
However, despite over four decades of experience of Islamic banking and finance, the industry has its critics, both Muslim and non-Muslims (African development Bank, 2011). According to Nguena, (2014) Islamic finance products and services are often accused of mimicking those of the conventional financial system, while some criticisms consider the Islamic financial system as window dressing.
Islamic banking eliminates the barrier between those who save and those who invest, and bring them closer to the real market. that is, it eliminates the barrier between individuals and entrepreneurs. The nature of financial intermediation of Islamic banks significantly defers from conventional banks and it is in harmony with real market and development changes in it.
The underlying principle of Islamic banks is the principle of justice which is an essential requirement for all kinds of Islamic financing. In profit sharing of a financed project, the financer and the beneficiary share the actual or net profit/loss rather than throwing risk burden only to the investor. The principle of fairness and justice requires that the actual output of such a project should be fairly distributed among two parties. If a financer is expecting a claim on profits of a project, he should also carry a proportional share of the loss of that project.
In contrast with conventional finance methods, Islamic financing is not centered only on credit worthiness and ability to repay the loans and interest, instead the worthiness and profitability of a project are the most important criteria of Islamic financing while the ability to repay the loan is sub segmented under profitability.
In spite of the growth potential in Islamic banking, studies have shown that several challenges have been facing Islamic financial institutions and Nigeria stands to be faced by such challenges. Eze and Chiejina (2011) identified these challenges to include shortage of experts in Islamic banking, uncertainty in accounting principles involving revenue realization, disclosures of accounting information, accounting basis, valuation, revenue and expense matching to Islamic banks. Thus, the results of Islamic schemes may not be clearly defined, particularly profit and loss shares attributed to depositors (Khan and Bhatti, 2008).
Apart from these financial and accounting issues, there are also issues of knowledge of the people over operations of Islamic banking. According to Brown, Hassan and Skully (2007), many people do not understand Islamic banking; this includes both Muslims and non-Muslims. The fact that sharia boards, which oversee the transactions in relation to the Qur’an, are often at the individual bank level, can lead to many interpretations of what is and what is not a suitable ‘Islamic’ transaction. Other problems include a lack of suitable trained staff able to perform adequate credit analysis on projects, as well as suitable managers, rather than just the owner. Latest technologies as used in conventional banks are often not used by Islamic banks.
Furthermore, in a study carried out by Iqbal and Molyneux (2005, they found out some challenges facing Islamic banking which they termed ‘unresolved issues’. These include problems of conditions of participation in equity markets, delinquent borrowers and the issue of penalties, indexation, financial engineering, risk management, appropriate legal framework and supportive policies, regulation and supervision, development of a money market, corporate governance, human capital formation. In the Nigerian situation, the problem of policy making and implementation have often been lack of proper communication to the people by the government of the benefits they stand to get from a policy and the methods by which a particular policy is to be implemented. The proposed Islamic (non-interest) banking system may not see the light of the day if not properly communicated to the people before its full implementation. Again, religious-wise, the proposed Islamic non-interest banking will definitely encounter the challenge strict competition and comparison with the existing conventional banks in the country. Their activities will always be viewed and interpreted from religious angle as Nigeria is a highly religious sensitive country. This controversy has already begun.
There is no misgiving that the development of Islamic banking system plays an Important role in an economy as many writers have maintained that the development and the efficiency of such financial system is closely linked to economic growth. They have pointed out various channels through which Islamic banking system affects economic prosperity. Popular amongst such studies are; Goaned (2008); Furqan and Mulyany (2009); Iqbal and Murakhir (2013); Iqbal (1997); Tabash and Dhankar (2014); Abuh and Chowdury (2012) etc. but their works are mainly narrowed to Gulf Cooperation Countries GCC and Asian countries. However, the available literatures to Islamic banking are limited to theoretical components and only few studies to some extent linked economic prosperity with Islamic banking system. Thus, creates a vacuum in the literature. To help in filling this gap, necessitate the need for this study.
1.3 Research Question
The research questions, which would guide this study Is as follows:
